indexfundfan @ indextown » Investing

Portfolio Return for June 2010

indexfundfan — Sat, 24 Jul 2010 04:58:40 +0000

Comments: Portfolio outperforms the benchmark by almost 2%, primarily due to Precious Metal equity and the MLP allocation. At first I thought this was a mistake until I did a rough verification with the following performance information (for June 2010):

Portfolio Return for May 2010

indexfundfan — Sun, 18 Jul 2010 15:22:44 +0000

Portfolio Return for April 2010

indexfundfan — Sun, 18 Jul 2010 15:21:00 +0000

Comment: My portfolio caught up with the benchmark due to the heavy dose of PrecMetal equity, which outperform significantly in the month.

Portfolio Return for March 2010

indexfundfan — Sun, 18 Jul 2010 15:05:40 +0000

Reducing income during retirement to qualify for healthcare subsidy

indexfundfan — Sat, 27 Mar 2010 15:56:23 +0000

The recent passage of the healthcare overhaul has prompted me to look closer at the issue of early retirement. There is a choice to work less and spend more time with family. Or even retire early and have the government subsidies your health care insurance by keeping income levels below 4x the poverty rate (see this Health Reform Subsidy Calculator).

The following is a list of items to reduce income:

If you have kids, and you want to help to pay for their college, plan to have more of it funded by 529 accounts. If you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI.
Pay off mortgage if possible to eliminate income requirement. Again, same thing as college funding, if you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI. Without a mortgage, you have less need to realize capital gains or draw down from tax-deferred accounts.
Derive income for ongoing expenses from tax exempt bonds (tax exempt income does not figure into MAGI).
Use a short term tax exempt fund to hold non-immediate cash needs instead of a high yield savings account. Perhaps top up the checking account once or twice a month. This reduces the amount of interest payments reported in MAGI.
Shift equity investments into lower yield equivalents, while still keeping the general composition of the portfolio reasonably unchanged. One potential candidate would be to invest in US LargeCap Growth instead of US LargeCap Blend. Does not work for US SmallCap (US SmallCap Growth has a poor historical record).
Invest in rental property and use rental income to fund ongoing expenses (rental income is typically offset by property depreciation).
Look into MLP investments that shield income for as long as the investment is not sold (you can control when to sell if necessary).
Delay signing up social security.

Even though it looks like I could potentially benefit from the healthcare reform if I retire early, I don’t agree with the changes. They simply penalize people who are successful and are a disincentive to work. This can’t be good for the economy. But that is another story.

Portfolio Return for February 2010

indexfundfan — Tue, 02 Mar 2010 15:55:32 +0000

Comments: Rebalanced into INT EAFE. Moved 1% allocation from US SmallCap to US Timber.

Portfolio Return for January 2010

indexfundfan — Mon, 01 Mar 2010 01:37:11 +0000

Comments: PrecMetal equity fell about 12% in January. This contributed to a fall of about 0.5% to the portfolio. International equities, EAFE & EM, both also fell more than domestic stocks. These explained the under performance of the portfolio with respect to the benchmark (-3.23% versus -2.26%).

Portfolio Return for December 2009

indexfundfan — Mon, 18 Jan 2010 23:25:37 +0000

Comments: The portfolio gains 1.95% in December. The overall gain for 2009 is 29.49%. This is commendable considering the 28.2% loss in 2008.

However, when 2008 and 2009 were taken together, the portfolio’s performance is at a value of only (1-28.2%)x(1+29.49%) =0.930, i.e. there is a loss of around 7%.

2008 & 2009 proved to be a very good reminder of the need to stay the course. If an investor were to sell out at the bottom during Feb 2009, (s)he would not be able to participate in the rally starting from Mar 2009.

Portfolio Return for November 2009

indexfundfan — Mon, 18 Jan 2010 23:03:09 +0000

Comments: Portfolio made a huge gain of almost 4.5% in the month.

Adios to Wells Trade

indexfundfan — Fri, 15 Jan 2010 08:57:37 +0000

As I was reviewing some old notes I had of Wells Trade, the investment arm of Wells Fargo, I see a trend that Wells Fargo has been trying hard to make some money out of these “free-trade” accounts:

02/2008 : Introduced 100 free trades for PMA package with $25k or more.
08/2008 : Eliminated the respectable money market sweep funds and replaced them with a crappy bank account sweep.
12/2008 : Eliminated RMMXX, a relatively high yield MMF at that time, for purchase.
01/2009 : Close out fee increased from $50 to $75.
03/2010 : Close out fee to increase to $95.

In addition, Wells Fargo has been “cracking down” on people who did not actively use the checking account of the PMA package. These accounts are marked as “dormant” and quite a few people reported having to jump through some hoops to re-activate them again.

With the talk of additional tax on big banks, I won’t be surprised to see another round of fee increase on the horizon. The money for the taxes has to come from somewhere.

Wells Trade did have some good points. Their reps are quite friendly and helpful, and the trading system, while nothing fancy, generally works. They also introduce a good online feature, which is the capability to track and specify specific tax lots for trading, very helpful for a taxable account.

Anyway, because of my upcoming Roth conversion, I am done with Wells Trade. I will be contributing $75 to them for the free trades they have given me over the past three years or so when I close out my accounts later this month. Good luck to all those sticking with Wells Trade.

Portfolio Return for October 2009

indexfundfan — Fri, 06 Nov 2009 15:22:21 +0000

Comments: Portfolio was on track to gain for the fourth month in a row until the last week of October. In the end, the portfolio had a small loss of 1.66%. Took the opportunity to rebalance out of US LargeCaps and PME into US SmallCaps, US Timber/REITS and International EAFE equities.

Portfolio Return for September 2009

indexfundfan — Thu, 05 Nov 2009 18:38:24 +0000

Comments: Sold off some PME to buy US LargeCaps.

Reduce your California tax withholding to avoid an IOU next April

indexfundfan — Mon, 02 Nov 2009 19:49:40 +0000

As far as I know, California state has raised the tax withholding rates twice this year. The first was for payrolls starting from May 2009 and the second is for payrolls starting from November 2009. The latest increase is reported in this LINK.

If I remember correctly, the increase in May 2009 was due to the increase in the tax bracket from 9.3% to 9.55%. This led to the corresponding increase in withholding from 9.3% to 9.55%. This is a reasonable change (I am just saying that the change in withholding is logical; NOT that the increase in tax rate is in any way logical in a recession).

Above: Tax withholding rates (before 11/1/09)

Above: Tax withholding rates (from 11/1/09)

In the most recent increase, the withholding rate was increased by 10%. For most people, this increases the withholding from 9.55% to 10.505%. There is no logical reason behind this; the only reason for this was that the state government wants an interest free loan from the tax payers.

Below are some comments reported in the LA times regarding this change:

“Many families are sitting at their kitchen table wondering how they’re going to make ends meet,” said state Sen. Tony Strickland (R-Thousand Oaks). “At the same time, the state of California is taking a no-interest loan.”

Such temporary measures as the withholding tax increase don’t really fix the budget gap, “they just more or less hid it,” said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. “I call it a fraud.”

But there is a way out of this:

Savvy taxpayers can get around the state’s maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state’s Franchise Tax Board.

“People can get out of this,” she said, noting that most people would have to change their allowances through their employers. California’s budget leaders are banking on the hope that most won’t.

This is exactly what I did. I submitted the DE-4 form to slash my additional state tax withholding to zero and added the corresponding allowances as provided by the withholding guidelines. This will bring me very close to the 90%-mark for the amount of taxes to be withheld without paying an under-withholding penalty come April 15, 2010.

If you are in a situation to already receive a refund next year, take some time to update your withholding by completing the DE-4 form

http://www.edd.ca.gov/pdf_pub_ctr/de4.pdf

For all you know, as it already happened this year, when it is time to get your refund, the state might not even have the money to pay you and you will get an IOU instead. I would rather owe the state money than the other way round.

Additional links

[1] http://www.bogleheads.org/forum/viewtopic.php?t=45134&mrr=1257174149

[2] http://online.wsj.com/article/SB10001424052748703932904574511923279377100.html

[3] Sign the petition to repeal this additional withholding — No to Sacramento!

Portfolio Return for August 2009

indexfundfan — Fri, 04 Sep 2009 14:56:20 +0000

Comments

Portfolio continues to recover. Sold off some US REITs to rebalance after their huge run up over the past few months.

Muni ETFs with in-cash creations

indexfundfan — Fri, 07 Aug 2009 16:12:56 +0000

Indexuniverse has an interesting article on in-cash ETF share creations for muni ETFs as opposed to in-kind creations. The article attempts to explain how in-kind creations can help to eliminate ETFs trading premiums in cases where the underlying securities are relatively illiquid.

The following figure shows the trading premiums of the two types of ETFs.

Clearly allowing cash creations helped to reduce the trading premiums.

It sure looks like there is yet another factor to consider when purchasing ETFs, especially if the underlying assets are illiquid.

Does an asset class allocation of less than 5% make sense?

indexfundfan — Thu, 06 Aug 2009 23:25:48 +0000

In allocating the asset classes in a portfolio, many “experts” recommend that to keep things simple, it does not make sense to sub-divide the portfolio into anything less than 5%. The usual cited reason is that it complicates the portfolio with very little increase in benefit.

For example, if an asset class has an allocation of 2.5%, even if it were to gain 20%, its overall impact on the portfolio is going to be only 0.5%.

Recently, this question came up on the Bogleheads’ forum Why allocate less than 5% to anything? Roy crunched some numbers for illustration:

Since 1972: 100% S&P 500:
CAGR 9.26%
Standard Dev 18.59%

Since 1972: 97.5% S&P 500 and 2.5% CCFs:
CAGR 9.35%
Standard Dev 18.17%

Since 1972: 95% S&P 500 and 2.5% CCFs and 2.5% REITs:
CAGR 9.43%
Standard Dev 17.97%

There appears to have supporters on each sides. Yet, the resident experts both seemed to be OK with the idea of less than 5% allocations:

Larry Swedroe has about 3% in CCFs in his personal portfolio and Rick Ferri suggests only 2% or so in microcap.

For me personally, my current minimum allocation is 4%. Larry sums up this issue with the following statement:

It is not an issue of doing much, if the cost is effectively zero if it adds anything it should be done.

Portfolio Return for July 2009

indexfundfan — Mon, 03 Aug 2009 15:35:50 +0000

Comments: Portfolio continues to recover from last year’s drop. The gain for the month was 7.13%. Current Equity:Bond ratio is 69.4:30.6, with the target being 67:33. If this run continues, I expect to have to rebalance out of equities to fixed income soon.

Squeezing out more tax efficiency from my portfolio

indexfundfan — Thu, 30 Jul 2009 17:28:27 +0000

My portfolio is currently allocated as follows:

US LargeCap 11%
US SmallCap 8%
US REITs 4%
US Timber REITs 4%
US MLP (PIK dividends only) 4%
INT EAFE 20%
INT Emerging Market 11%
PreciousMetal Equity 5%
Fixed Income 33%

The ranking of the asset classes, in terms of tax efficiency (based on historical dividends), are as follows (most tax efficient at the top):

US MLPs EEQ & KMR (with PIK paid-in-kind dividends only) : 0% taxed.
US Timber REITs PCH, PCL & RYN: 0% taxed due to my enormous capital losses accumulated (see related post “Tax-Free Dividends from Timber REIT Investing” HERE).
US SmallCap (IJS) : distribution yield ~2.0% will be taxed.
PreciousMetal Equity (GDX) : distribution yield ~2.0% will be taxed.
US LargeCap (IWB) : distribution yield ~2.8% will be taxed.
INT EAFE (VEA) : distribution yield ~4.0% will be taxed.
INT Emerging Markets (VWO) : distribution yield ~5.0% will be taxed.
Least efficient : US REITs and Fixed Income.

The commonly sprouted ‘wisdom’ of putting International equities and emerging market equity in the taxable account so as to get the foreign tax credit is coming back to bite me now (and probably in future as well) with huge 4% (VEA) and 5% (EEM) distribution yields. This is ironic considering that VEA is simply just another class of Vanguard’s Tax-Managed International stock fund.

On the other hand, US SmallCap Value has a sub-3.0% yield but ‘experts’ usually would recommend putting this asset class into tax-deferred accounts.

Anyway, based on this analysis, I have been re-directing new money in the taxable account to the most tax-efficient assets listed above.

Portfolio Return for June 2009

indexfundfan — Fri, 24 Jul 2009 06:51:34 +0000

Comment: Completed my 4% allocation into MLPs with PIK dividends in the taxable account.

Portfolio Return for May 2009

indexfundfan — Fri, 24 Jul 2009 06:48:46 +0000

Change: Added MLPs which distribute dividends as PIK (payment-in-kind) : KMR & EEQ. This whole business with mega-bailouts and deficits from an administration that clearly will hike taxes in the near future caused me to re-examine my portfolio to try to squeeze out more tax efficiency.

indexfundfan @ indextown » Investing

Portfolio Return for June 2010

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